We learn from life as we live it.  This month Joe shares with us some important life tactics that he learned from a friend who recently passed away.  The lessons all have to do with keeping our minds alert and learning from our mistakes.  We must free our lives of clutter by getting things done.  The best way to achieving a freer lifestyle is the Nike motto, "Just Do It." Take a look at this thoughtful video and see if the advice fits your lifestyle.

Click here or on the image above to view the video.

 

*This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.

 

Does facing a smiling salesperson with shiny late-model cars surrounding him or her in an auto showroom, ready to pounce, make you feel intimidated? Perhaps online automobile shopping is for you.  This article from cooltobefrugal.com explains the ins and outs of shopping for cars online.

Trent Hamm of The Simple Dollar advances the proposition that practicing a frugal lifestyle enables us to live life to the fullest, rather than the opposite.  He believes that frugality simply means moving your spending from things that are less important to you to things that are more important to you wherever possible.  See if you agree. 

  

One of the biggest arguments against being "frugal" is that it restricts you from "living life." Whenever I hear that argument, I usually think that the person involved isn't actually being frugal at all.

 

In fact, I would go so far as to argue that making frugal choices actually does the opposite - it enables you to live life more fully than before.

 

The grocery store example

I think I can explain this idea simply in terms of a grocery store trip.
 
Let's say you go into the grocery store and have $100 to spend to buy a week's worth of groceries for you and your partner (we won't talk about kids here - we'll keep it nice and simple).

When you walk down the bread aisle, some of the breads cost $1 a loaf and others cost as much as $5 a loaf.

When you examine the cuts of meat, some of the meats cost $2 per pound and others cost $8 per pound.

When you look at the milk options, some of the milk costs $2.50 per gallon and others cost $7 per gallon.

You could use virtually any product in this example - cheese instead of milk, trash bags instead of meat, beans instead of bread. Almost everything you see in a grocery store has a range of prices like that.

When you're making your choices, it's often tempting to just get the "good" version of everything. You might grab the $5 bread and the $8 meat and the $7 milk.

At the end of the trip, though, you'll find yourself with much more than $100 worth of stuff in your cart. This is the situation that people find themselves in when they get into credit card debt.

So, how do you go about getting back under that $100 limit? Do you simply put back some of the items and do without? That's a pretty miserable response. It doesn't feel particularly good to swap some of the items for cheaper versions, either. Those approaches are why frugality feels like you're not "living life" - you have this sense of giving up things that you care about.

A truly frugal person's approach to shopping

When a frugal person looks at the breads, that person decides whether or not expensive bread is actually important to them. Does it really matter much at all if I get the expensive bread or the cheap one? Does $5 bread signify a major life improvement over the $1 bread?

Even more important than that, the frugal person asks themselves whether they'd rather take that $4 and use it to get better milk, coffee, or something else they care more about.

When I go to the grocery store, I'm extremely picky about the eggs that I buy. I prefer the free range eggs because they taste much better to me and are less likely to have lots of sulphur in the yolk. I'm willing to pay more for those eggs.
 
At the same time, I'm not particularly picky about the bread that I buy, as long as it's whole wheat. Getting the great expensive bread doesn't add to the quality of my life in any significant way. So, I buy the cheap bread and the money I save helps to buy the expensive eggs while still keeping me under budget.

Spend more on what you really care about

I choose to spend as little as I possibly can on the stuff I don't really care about so that I can spend more on the stuff that I do care about.

That principle expands into the rest of my life. For example, I personally don't care about driving a nice, shiny car. I just want something that gets me from place to place, so I choose not to spend much on my automobiles. I haven't had a car payment in several years.

I don't care what kind of laundry soap I use as long as the clothes get clean, so I buy extremely cheap soap or make my own. I don't care what kind of ketchup I buy, as I rarely use it. I don't really value having gum or soft drinks from the gas station because I usually have a water bottle in the car already. As long as I can do the things I want to do, I prefer to spend as little on home energy use as possible. I could go on and on like this.

These are all things I personally don't care much about. In fact, my actual list is quite a bit longer, including lots of typical pantry and household items, as well as entertainment bills and eating out. Your list of unimportant things might look much different than mine.

The money I "save" by not spending it on things I don't care about lets me buy things I do care about without worry. Because I have this long list of unimportant things that I make sure to spend as little on as possible, I have plenty of money left over for the other things in life that I really do care about.

That's all frugality is. Whenever you see a long list of frugality tips, it's just a list of ideas on how to cut back on the things you don't care about. Since the writer doesn't necessarily know what you find important and what you don't, you're expected to choose from the items on the list so you're cutting back on the unimportant things.

It becomes miserable when you decide you need to use every frugality tip and end up cutting back on the things that are important to you.

Another big part of frugality is deeply understanding what's actually important to you. I use a few simple tests to figure this out. One, will I care about this purchase a week from now? If I won't, then it's probably not important and I should go cheap (or not buy it at all). Two, does this product actually do something I couldn't already do? Usually, the answer is no, which means it's not worth buying. Three, will this make my future life better in some fashion? This points me toward the value of repaying debt and saving for the future, as both of those moves reduces stress and increases options down the road.

It's actually worth spending some time thinking about how you spend money in that way. Is this really important to me? Is $10 per month spent on Netflix providing more for my life than a $10 extra payment on my mortgage each month? Will $7 spent at the coffee shop add more to my life than $7 put toward replacing a broken blender? Thoughts like that go through my head all the time when I'm driving or doing other things.

Frugality simply means moving your spending from things that are less important to you to things that are more important to you wherever possible. It means spending less when possible on the things you must have, choosing the cheapest possible option (or going without) on the things you don't care much about, and thus leaving yourself with plenty of money for the things you do care about.

Making a frugal decision should never, ever increase your misery. That goes against the whole idea. If you're feeling miserable about how you're spending your money, then the real culprit is insufficient income. Frugality just means you're figuring out how to take what you have and make optimal choices with it.

 

 

 

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Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor's. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000� Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury's daily yield curve. The Barclays Capital Mortgage-Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index measures the performance of intermediate (1- to 10-year) U.S. TIPS.

Markets bounce around as economy improves

Financial markets were volatile during April, even as most recovered to show little change. The Dow Jones Industrial Average was up 0.87 percent, and the S&P 500 Index gained 0.74 percent, while the Nasdaq dropped 2.01 percent. The small changes in the Dow and S&P 500 masked two intramonth declines of about 2 percent and 3 percent, respectively, driven by growth fears, which hit technology and momentum-oriented equities. This differential drove the Nasdaq, which has a higher population of these stocks, to a worse performance for the month and into negative territory for the year.

Earnings were also a concern. Early reports actually showed a decline in corporate earnings over the previous quarter. Although data from the end of April moved earnings back into growth territory, the numbers were below what had been initially expected. The uncertainty about earnings growth, combined with bad news about the Chinese economy and the Ukraine situation, made investors nervous. These mid-month losses were recovered, but they prevented further gains.

Technical factors also showed weakness during the month. Several technical support levels were violated, although only for a limited time. The averages remain well above the most worrisome levels, but some damage has been done, and this merits watching.

Developed international markets performed more strongly than U.S. markets, with the MSCI EAFE Index up 1.45 percent, although they continued to trail year-to-date. About half of this came from currency appreciation relative to the dollar. The strong month was in part a bounce back from previous underperformance and also reflected less exposure to technology and momentum stocks. The MSCI Emerging Markets Index was up less-0.06 percent-which reflected the uncertainty surrounding China's economy.

Once again, longer-duration fixed income securities performed best. High-quality, longer-dated bonds and TIPS posted the strongest returns in April, because of investor demand for certainty and yield. The worst-performing area within bond markets was the floating-rate bank loan space, which was essentially flat for the month. Short-duration bonds also experienced lackluster performance. Overall, the Barclays Capital Aggregate Bond Index returned 0.84 percent.

Spring continues for U.S. economy

After the economic weakness of January and February, statistics for March showed the slowdown to be largely due to weather. The employment numbers for March highlighted much stronger job growth, which was confirmed by even better April employment data. Private jobs touched a new high, breaking the level from before the financial crisis, even as unemployment claims averaged at low levels, despite bouncing around. Overall demand for labor was strong, with the average hours per week at historically high levels.

Better employment led to increased consumer confidence and also to higher spending, a primary driver of the economy. Retail sales were up an unusually robust 1.1 percent, which probably partially reflected pent-up demand from the poor weather months but still was well above expectations. Personal consumption, a wider measure of economic activity, rose at a brisk pace.

The news was not all good. Economic growth was reported as 0.1 percent for the first quarter of 2014, but because this largely reflected bad weather in January and February, it was not a significant concern. More worrisome was an apparent slowdown in the housing recovery. Even as prices continued to increase, activity levels slowed, apparently due partially to the weather, but more due to a lack of supply. Although the slowdown is arguably good news, reflecting a more normal market, it remains an issue worth watching.

The Federal Reserve continues to taper

As expected, the Federal Reserve (Fed) continued to reduce its bond-buying program by an additional $10 billion, to $45 billion per month. There was speculation that the weak first quarter might have led to a pause, but the Fed concluded that the economic recovery was strong enough to continue the pace of purchase reductions. Despite the continued taper, rates actually fell during April, which should help the housing market continue its growth, and illustrates that, despite the Fed's reduction in stimulus, an increase in rates is by no means assured.

International uncertainty remains

There were two major worries from around the world for U.S. investors in April. The situation in Ukraine continued to simmer. Although the expectation was for an eventual resolution, investors still worried that tensions seemed to be escalating. There is a growing conflict between the U.S. and our European allies about how to address the situation; Germany in particular is strongly lobbying against increased sanctions.

The second area of concern is China, where signs of a significant slowdown continue to appear. Chinese manufacturing and exports are showing lower-than-expected growth, and there are hints that China's leaders realize that slower growth may be necessary to unwind some of the country's financial imbalances. Keep in mind that in this case, slow growth might mean a still healthy 6 percent or so, but this represents a significant change from recent history. Additionally, the potential for policy errors could damage the world economy, as well as China's.

Spring is here

As we move into the second quarter, it seems clear that spring is here for the U.S. economy after the weather slowdown of the first quarter. Steady improvements in employment and consumer spending are clearly optimistic signs. Even though worries remain, especially about the pace of wage growth, the trends appear not only favorable but improving for the real economy.

Financial markets are less certain. U.S. market results for the month, while not a concern, showed signs of potential weakness. Company earnings, though beating current expectations, are not particularly impressive. Technical damage was also done to the major indices in April, and therefore markets bear watching.

Overall, our stance remains optimistic, but with elements of concern about the financial markets, which remain vulnerable to uncertainty. As always, a diversified portfolio constructed around an investor's own risk tolerance and time frame should help achieve goals, regardless of what happens in the interim.

Authored by Brad McMillan, vice president, chief investment officer, and Sean Fullerton, investment research analyst, at Commonwealth Financial Network.